A Plan to Cut Oakland's Pension Debt

Hoping to raise instant cash, some Oakland officials want to sell bonds to refinance part of a huge debt owed to the city's police and fire pension fund.

The city would sell about $400 million worth of bonds to investors, plowing the borrowed money back into the retirement trust. The trustees would reinvest the cash. If the return on these investments beat the interest rate on the bonds over the 14-year term of the deal, the fund's debt would be reduced.

However, if the markets went into a long slump and the investments generated less money than the fund needs to pay its bills, the city would have to dig into its pockets to make up the difference. Critics say the risk is not worth the gain.

"This is essentially like taking your home equity loan out and reinvesting all of it in stocks and bonds and try to get a better return," said Leila Gough, an investment adviser and a former chairwoman of the Oakland citizens' budget advisory committee.

No decision has been made on whether to go ahead with the refinancing, but the City Council has ordered up a detailed proposal from a group of investment bankers led by Grigsby Brandford & Co. of San Francisco. The proposal should be ready for a vote in April.

The bankers' commission on a $400 million deal would be about $2 million.

The possible fiscal maneuver comes at a time when the city is facing questions about whether it took an excessive risk in guaranteeing a deal to lure the Raiders football team back from Los Angeles. Taxpayers will be on the hook if seat-license sales fall short -- and so far they have been less than projected.

As in the Raiders deal, the rewards of the pension refinancing would be immediate and the risks would be in the future.

The gain would come from swapping part of the existing pension debt for debt borrowed at a lower interest rate. The existing debt is calculated at 8 percent; at today's rate, the bonds would cost about 6 1/2 percent.

Because of the cost difference, the city could end up paying its bond holders as much as $2 million less each year in principal and interest than it now pays its pension trustees in cash required to reduce the fund's debt.

GROWING COST

Advocates say that would be welcome relief to city budgets groaning under the weight of annual contributions to the retirement fund. The payment is $32 million this year, climbing to $55 million in 10 years if nothing is changed.

Oakland politicians often complain that they cannot satisfy constituent demands for such things as more police officers and longer library hours because the City Charter says they must set aside money to rid the fund of its debt. The payments are required under a 1976 voter action that ordered the city to pay off the debt in 40 years.

HOW CITY GOT IN HOLE

The fund got into a hole in the 1970s because money going in did not keep up with payouts to retiring police officers and firefighters.

Oakland "shouldn't be afraid to be innovative," City Council member Ignacio De La Fuente said. "That's why we have less resources today than 10 or 20 years ago."

Fifteen public agencies in California have done similar refinancings, though Oakland's would be involve one of the biggest infusions of new money as a percentage of existing funds. With budgets strained by tax limits and slow economic growth, cities cannot afford to overlook measured risks with their investments, advocates say.

RELIANCE ON STOCKS

As much as half of the new Oakland money would go into stocks, a prospect that has critics nervous.

The trick is that the stock part of the mix would have to generate steady returns above a certain level for the deal to improve on what the city now has. Opponents say that is no stretch, given the historic performance of the stock market, but critics are nervous.

Pension fund costs are already unpredictable, and the refinancing would add another variable, they say.

"What if the stock market is dramatically overvalued today? . . . What if this whole Harvard market-analyst-driven (economy) is a false economy and we go into a slide?" said Craig Kocian, the city manager.

Other opponents of the refinancing said City Hall should not be tempted by easy money.

"The candy is there," council member Dick Spees said sardonically, "and we'll grab it."